In a move that may come as a dampener for policyholders whose life cover is less than 10 times their premium paid in a year, finance minister Arun Jaitley has proposed to impose a tax deduction at source (TDS) of 2 per cent on the sum paid under the life insurance policy by the insurer.

This will, however, be applicable to policies that are not covered under Section 10 (10D) of the Income Tax Act.

While death benefit under the plan is always tax free under Section 10 (10D), the benefits under the Section are available to schemes only if the premium paid in not more than 10 per cent of the sum assured.

It has, however, proposed to keep the small tax payers out of the net and said that there will be no deduction within this provision if the aggregate sum paid in a financial year to an assessee is less than Rs 1 lakh.

So, if at the time of surrendering of the policy, the surrender value of the policy is Rs 5 lakh, then the insurance company will deduct a tax of Rs 10,000 on that amount and pay the remaining Rs 4.9 lakh to the individual.

“At the time of surrender now we will have to figure out whether the cover is ten times the premium or not and in case it is not there then 2 per cent tax will be deducted, as has been proposed in the budget,” said Vibha Padalkar, ED & CFO, HDFC Life. She added that in the long-term it would lead people to choose higher life insurance cover.